The resection we had to have

Pigs are flying in flocks as Telstra has a change of heart on separation. Given the vitriol of the past few years, Rudd and Conroy deserve credit for bypassing the copper loop and, in so doing, bringing Australia's most big-mouthed telco in line at last.
Written by David Braue, Contributor

Looking through the window a few moments ago, I would swear I saw a big pink piggy with wings hurtling through the air.

Little wonder: this week, after years of not-over-my-dead-superannuation-fund posturing, Telstra chair Donald McGauchie is now talking openly about the possibility of separating the company and working closely with the government on the NBN.

Donald McGauchie

Donald McGauchie (Credit: David Braue/ZDNet.com.au)

Has McGauchie had a brain transplant? Because it was only a few months ago, at Telstra's AGM, that he was restating his near-constant offensive against the very thought. "Separation has meant that [BT and Telecom NZ] are so badly damaged that they are no longer capable of a major investment," he told the audience in what was quite a frustrated tone of voice. "Certainly not the sort of investment required to build next-generation networks."

He said it, and more. I was there. Thousands of people heard it. Yet this week, as the initial enthusiasm over the NBN announcement gives way to the inevitable devil's-in-the-detail recriminations, we now hear that Telstra is not only looking forward to working with the government, but is setting up an NBN office to handle the relationship.

As a major holder of capital, Telstra will most certainly try to buy a significant share of the new NBN company so it can exert control over its operations

Most strikingly, Telstra is apparently now open to discussions about voluntary separation. Despite rumours over the past few weeks, I was as surprised as you to read that. Just to make sure I was understanding correctly, I looked up "voluntary" at Dictionary.com: "Done, made, brought about, undertaken, etc of one's own accord or by free choice."

Porcine aviation is only the beginning; Telstra apparently realises it has a lot of sucking up to do. Can it be long until McGauchie is pressing the flesh and kissing babies on the street?

It's hardly the kind of charm offensive anybody would have expected just a few weeks ago, when Telstra was still smarting from its NBN dismissal and firing on all barrels as it announced take-that-you-so-and-so's upgrades to both its Next G wireless and hybrid fibre-coax (HFC) cable network.

With the announcement of NBN Mark 2, these investments will become redundant, to some extent: Telstra now finds itself jockeying for position in a public-private venture with its long-avowed enemy — to build a network that will compete with its own fixed infrastructure.

Last week I lambasted the political waffling that led to the new NBN, but with regards to Telstra it was a brilliant move. By sidestepping the copper loop entirely, Rudd's new NBN has finally delivered a workable (if it can be financed), albeit politically difficult, solution to the lingering issues raised by the previous government's shockingly-executed privatisation of Telstra.

Remember that the possibility of Telstra separation was until recently so ridiculous that it was floated as an April Fool's joke — sending Telstra's shares vacillating in a $1.9 billion roller-coaster ride by those who failed to notice the idea was, at the time, patently absurd.

The thing is: separation of Telstra really isn't the leverage it used to be. Nobody cares about its copper anymore. In fact, if the new NBN can be delivered as envisioned — and that's a big "if" — it will render Telstra's copper and HFC networks irrelevant to the broader picture at hand. Telstra will not only be welcome to separate itself, but may need to do so to capitalise upon natural market opportunities.

One could even conceive of Telstra not only separating, but spinning off its infrastructure division in a move that would spare it having to keep funding the maintenance of what will be a second-rate copper network providing low-cost, relatively low-speed services. Such an investment would expose the copper loop to natural competition; divert those investments away from the government's NBN with promises of better returns from a nationwide infrastructure that is already largely amortised; and provide billions in the war chest to help Telstra reinvent itself as a value-added provider of content and services.

These are interesting times. The exact repercussions of the new broadband order will only be felt as details emerge over time, but it is already delivering rewards by forcing Telstra to awake from years of monopoly mentality and compete on its own merits.

Sure, Telstra saves face with a role in this NBN project — but that involvement will be on the same terms as every other player, with none of the legacy advantage Telstra has so far enjoyed.

Separation of Telstra really isn't the leverage it used to be

Indeed, Telstra's participation in the previous tendering process had one very problematic result: the government now has a detailed map of Telstra's entire infrastructure, and can plan its new network with the confidence of someone who has peeked at the answer cards inside the envelope during a game of Cluedo. Heck, for all we know, this new contract is just a ruse to get Telstra to separate and push through more-competitive copper loop legislation before Rudd throws up his hands when the funding falls through.

We'll assume for now that the NBN is a going concern. As a major holder of capital, Telstra will most certainly try to buy a significant share of the new NBN company so it can exert control over its operations. The government will of course need to anticipate this, with caps on individual company investments to ensure that Telstra cannot organise filibuster-capable representation on the NBN company's board.

One suspects McGauchie and his crew may even start tucking away profits in a corner somewhere, earning comfortable dividends until the completed NBN goes up for full privatisation and they can try to buy a controlling interest in it. Harry Potter's Lord Voldemort waited over 10 years to begin his quest to regain his human body, so by those standards a 13-year wait isn't that much worse for Telstra.

Or perhaps it is. Because, despite all the questions and complexities the NBN raises (as I explored last week and will continue to do) those 13 years will be spent in the painful knowledge that Kev and Steve finally beat Telstra at its own game. It may be a Pyrrhic victory for a massively debt-ridden government, but it is a victory nonetheless.

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